Is your KiwiSaver quietly underperforming, jeopardizing your retirement dreams? Many New Zealanders passively contribute, assuming their KiwiSaver is on track, only to discover years later it hasn’t grown as expected. This article helps you identify red flags in your KiwiSaver, understand its performance, and make informed decisions to maximize your retirement savings.
Fee Structures: Are You Paying Too Much?
KiwiSaver fees vary significantly, and understanding them is crucial. These fees eat into your returns, and even seemingly small differences can have a substantial impact over the long term. There are typically two main types of fees: administration fees (charged to cover the general running of the fund) and investment management fees (charged for managing the investments within the fund). Some providers may also charge performance fees if the fund exceeds certain benchmarks, but these are less common.
The Financial Markets Authority (FMA) provides a KiwiSaver Fund Finder tool which shows the range of fees charged by different providers. For instance, a growth fund might have administration fees ranging from $20 to $60 per year and investment management fees between 0.25% and 1.25% of your fund balance. Consider this: if you have a $50,000 balance, a 1% difference in fees could cost you $500 per year! Over 20 years, this difference could add up to tens of thousands of dollars, even before considering the impact of compounding.
To assess if you’re paying too much, compare your fees against the average for funds with similar investment strategies. Websites like Sorted.org.nz allow you to compare KiwiSaver schemes and their fees. Look for providers with lower fees while offering comparable investment options and performance. Don’t hesitate to contact your provider and ask for a breakdown of the fees you’re paying and how they compare to the market average.
Fund Performance: Beating the Benchmark
While past performance isn’t a guarantee of future results, consistently underperforming against its benchmark should raise a red flag. Every KiwiSaver fund has a benchmark, which is a market index or a group of similar funds that it’s measured against. A growth fund, for example, might be benchmarked against the NZX 50 index or a global equity index. Check your fund’s Product Disclosure Statement (PDS) to find out its benchmark.
Your KiwiSaver provider should provide regular performance reports. Analyze these reports, not just looking at the overall return, but also comparing it to the benchmark. If your fund is consistently lagging behind its benchmark, it suggests that the investment strategy may not be effective, or the fund manager may not be performing well. For instance, if the NZX 50 rose by 10% in a year, and your growth fund only grew by 6%, you need to understand why. While some underperformance is expected due to market fluctuations and fund-specific strategies, consistent underperformance warrants investigation.
Tools like Morningstar can provide independent analysis of KiwiSaver fund performance, allowing you to compare your fund against similar options. Before switching to a different provider based on performance, consider the timeframe. A short period of underperformance might be temporary, but a consistent pattern over several years should prompt action.
Risk Profile: Is It Still the Right Fit?
Your risk profile reflects your investment timeframe, tolerance for risk, and financial goals. Your KiwiSaver fund should align with this profile. Generally, younger people with longer investment timeframes can tolerate more risk (and therefore invest in growth funds), while older individuals closer to retirement might prefer lower-risk conservative funds or balanced funds. However, life changes can significantly impact your risk tolerance and investment timeframe.
Have you experienced any significant life changes? Consider the following examples: Getting married or divorced, having children, changing jobs, or experiencing a major health event. These events can alter your financial situation and impact your ability to handle investment risk. For instance, starting a family might make you more risk-averse, prompting a shift from a growth fund to a balanced fund. Or, unexpected healthcare costs might reduce your ability to tolerate market fluctuations.
Review your risk profile regularly, at least once a year, and whenever you experience a major life event. Most KiwiSaver providers offer online questionnaires to help you determine your risk profile. Answer these honestly and objectively. If your current fund no longer aligns with your risk profile, consider switching to a more appropriate option. Remember, it’s better to adjust your investment strategy to match your changing circumstances than to stick with a fund that no longer suits your needs.
Inadequate Diversification: Don’t Put All Your Eggs in One Basket
Diversification is a cornerstone of successful investing. A well-diversified portfolio spreads your investments across different asset classes, industries, and geographical regions, reducing the impact of any single investment performing poorly. KiwiSaver funds vary greatly in their level of diversification.
A fund overly concentrated in New Zealand equities is considered less diversified. While investing in local companies can be beneficial, relying solely on the New Zealand market exposes you to country-specific risks. A global fund, on the other hand, will invest in a wider range of companies and markets, including those in the US, Europe, and Asia. This diversification can help cushion the impact of economic downturns in any single region.
Examine your fund’s asset allocation. The PDS should provide details on the percentage of your fund invested in different asset classes (e.g., equities, bonds, property, cash). A well-diversified fund will typically have a mix of different asset classes and invest in a variety of geographical regions. If your fund is overly concentrated in a single asset class or region, consider switching to a more diversified option or adjusting your overall investment strategy to compensate for the lack of diversification within your KiwiSaver.
For example, if your KiwiSaver is heavily weighted toward New Zealand shares, you might consider investing in a global exchange-traded fund (ETF) outside of KiwiSaver to balance your overall portfolio.
Lack of Transparency: Know Where Your Money Is Going
Transparency is essential for accountability and informed decision-making. A transparent KiwiSaver provider will provide clear and concise information about its investment strategy, fees, performance, and who is managing the funds. Red flags include a lack of readily available information, complex or confusing reporting, and difficulty getting answers to your questions.
Can you easily find the PDS and other important documents on the provider’s website? Does the PDS clearly explain the fund’s investment objectives, strategies, and risks? Do the performance reports clearly show how the fund has performed against its benchmark? A provider that is reluctant to share information or communicate clearly should raise suspicion.
Try contacting the provider’s customer service with a question about your fund. Are they responsive and helpful? Do they provide clear and understandable answers? Are they willing to explain the fund’s investment strategy or fee structure? A provider that is difficult to reach or provides evasive answers may not be the best choice.
If you find it challenging to understand how your KiwiSaver is managed, consider switching to a provider with greater transparency and better communication. Remember, you have the right to know where your money is going and how it’s being managed.
Default Fund Inertia: Stuck in Neutral
Many New Zealanders are automatically enrolled in a default KiwiSaver fund when they start a new job. While this ensures everyone benefits from the scheme, default funds are typically conservative and may not be suitable for everyone, especially younger individuals with longer investment timeframes. Remaining in a default fund for an extended period can significantly hinder your retirement savings growth.
Default funds are designed to be low-risk and typically invest primarily in cash and fixed income (bonds). While these investments offer stability, they also tend to generate lower returns than growth assets like equities. For younger individuals with decades until retirement, a more aggressive investment strategy with a higher allocation to equities is generally more appropriate.
If you’re currently in a default fund and haven’t reviewed your KiwiSaver options, it’s time to take action. Use the tools mentioned earlier (Sorted.org.nz, FMA’s KiwiSaver Fund Finder) to compare different funds and determine which one aligns with your risk profile and investment timeframe. Don’t assume that the default fund is the best option for you. By switching to a more suitable fund, you can potentially significantly boost your retirement savings.
Consider this: If a 25-year-old in a default fund earning 3% per year switches to a growth fund earning 7% per year, the difference in their retirement balance could be substantial. Over 40 years, even a small difference in returns can have a significant impact due to the power of compounding.
Ignoring Contribution Rates: Leaving Money on the Table
KiwiSaver offers different contribution rates: 3%, 4%, 8%, or 10% of your gross salary. While contributing at least 3% is required to receive the full government contribution, contributing more can significantly boost your retirement savings. It’s critical to choose a contribution rate that allows you to maximize your savings potential without unduly straining your current financial situation.
The government provides a maximum annual contribution of $521.43 if you contribute at least $1,042.86 each year (which equates to contributing approximately $20 per week). This is essentially free money, and it’s crucial to take advantage of it. However, increasing your contribution rate beyond 3% offers even greater benefits, especially over the long term.
Consider the impact of increasing your contribution rate from 3% to 8%. If you earn $60,000 per year, increasing your contribution rate by 5% would mean contributing an additional $3,000 per year. While this may seem like a significant amount, the long-term benefits of increased savings and potential investment returns far outweigh the short-term sacrifice.
Review your budget and assess your ability to increase your contribution rate. Even a small increase can make a significant difference over time. Websites like Sorted.org.nz offer calculators to help you estimate the impact of different contribution rates on your retirement savings.
If you’re self-employed, you have the flexibility to contribute any amount you choose, up to the contribution cap. Make sure you’re contributing enough to maximize the government contribution and take advantage of the tax benefits of KiwiSaver.
Provider’s Financial Stability: Is Your Money Safe?
While the KiwiSaver scheme itself is designed to protect your money, it’s still important to consider the financial stability of your provider. A financially unstable provider could face difficulties managing your investments or could even be forced to close down, potentially disrupting your retirement savings.
Check the provider’s credit rating. Credit ratings are assigned by agencies like Standard & Poor’s and Moody’s and provide an assessment of the provider’s financial strength and ability to meet its obligations. A higher credit rating indicates a lower risk of default.
Look for information on the provider’s ownership structure and financial performance. Is the provider part of a larger, well-established financial institution? Has the provider consistently generated positive returns in recent years? While past performance is not indicative of future results, it can provide some insight into the provider’s financial stability.
While the FMA oversees KiwiSaver providers and has measures in place to protect investors, it’s still prudent to conduct your own due diligence. If you have concerns about your provider’s financial stability, consider switching to a more financially secure option.
Ignoring Target Date Funds: A Missed Opportunity?
Target Date Funds (TDFs) are a type of KiwiSaver fund that automatically adjusts its asset allocation over time to become more conservative as you approach your retirement date. These funds are designed to simplify retirement planning by automatically adapting to your changing needs and risk tolerance.
TDFs typically start with a higher allocation to equities (growth assets) when you’re younger and have a longer investment timeframe. As you get closer to retirement, the fund gradually shifts its allocation towards more conservative assets like bonds and cash, reducing your exposure to market volatility.
If you prefer a hands-off approach to investing and don’t want to actively manage your asset allocation, a TDF could be a good option. These funds offer a convenient way to ensure your investment strategy remains appropriate for your age and risk tolerance without requiring you to make frequent adjustments.
When choosing a TDF, make sure the target date aligns with your expected retirement date. Also, compare the fees and performance of different TDFs before making a decision. Some TDFs may have higher fees than others, and their performance may vary depending on their investment strategies.
Not Seeking Professional Advice: Navigating the Complexity
While it’s possible to manage your KiwiSaver on your own, seeking professional financial advice can be beneficial, especially if you’re unsure about which fund to choose, how much to contribute, or how to manage your investments in relation to your overall financial goals. A qualified financial advisor can provide personalized guidance tailored to your specific circumstances.
A financial advisor can help you assess your risk profile, determine the appropriate asset allocation for your investment goals, and choose a KiwiSaver fund that aligns with your needs. They can also help you develop a comprehensive financial plan that integrates your KiwiSaver with your other savings and investments.
When choosing a financial advisor, make sure they are qualified and experienced and that they have a good understanding of KiwiSaver. Ask about their fees and how they are compensated. It’s important to choose an advisor who is independent and who will act in your best interests.
Websites like the Financial Advice New Zealand offer directories of qualified financial advisors.
FAQ Section
What is KiwiSaver and why is it important?
KiwiSaver is a retirement savings scheme designed to help New Zealanders save for their retirement. It’s important because it provides a structured way to accumulate savings and receive government contributions, making retirement more financially secure.
How do I choose the right KiwiSaver fund?
Consider your risk tolerance, investment timeframe, and financial goals. Younger individuals with longer timeframes can typically tolerate more risk and should consider growth funds, while those closer to retirement may prefer conservative or balanced funds. Use online tools like Sorted.org.nz to compare funds and consult a financial advisor if needed.
What are the different KiwiSaver contribution rates?
The available contribution rates are 3%, 4%, 8%, or 10% of your gross salary. Self-employed individuals can contribute any amount they choose.
How do I switch KiwiSaver providers?
Contact your new provider and complete their application process. They will handle the transfer of your existing KiwiSaver funds from your current provider. The process typically takes a few weeks. Ensure you understand any potential fees associated with switching.
What happens to my KiwiSaver when I change jobs?
Your KiwiSaver account stays with you when you change jobs. You simply need to provide your new employer with your KiwiSaver details so they can continue making contributions.
Can I access my KiwiSaver funds early?
Generally, you can only access your KiwiSaver funds when you reach the qualifying age (usually 65). However, there are some exceptions, such as for the purchase of your first home or in cases of significant financial hardship.
How is KiwiSaver taxed?
KiwiSaver contributions are made from your pre-tax income, which reduces your taxable income. Investment earnings within your KiwiSaver account are also taxed at your Prescribed Investor Rate (PIR). Withdrawals in retirement are not taxed.
Call to Action
Don’t let your KiwiSaver stagnate! Take control of your financial future today. Start by reviewing your current fund’s performance, fees, and risk profile. Use the resources mentioned in this article to compare your options and identify potential red flags. If you’re unsure about anything, seek professional financial advice. Even small changes can make a big difference in your retirement savings, so don’t wait until it’s too late. Secure the future you deserve by acting now!
References
Sorted.org.nz
Financial Markets Authority (FMA)
Morningstar
Financial Advice New Zealand
